Practical financial accounting advance methods techiques and practices dr vataliya

PRACTICAL FINANCIAL
ACCOUNTING
(Advance Methods, Techniques & Practices)

Dr. K.S. Vataliya

PARADISE
PUBLISHERS
Jaipur (Indi

Published By :

PARADISE PUBLISHERS
E-479, Ground Floor,
Vaishali Nagar,
Jaipur - 302021 (Raj.)
Ph. : 0141-5114157
09460309322(M)

First Published - 2009

©Reserved

ISBN: 978-81-906151-4-3

Printed at : Ruchika Printers, Jaipur

All rights reserved. No part ot this book may be reproduced in any
form or by any mean without pe-rmissionin writing from the publisher.

CONTENTS

Financial Accounting is an Important subject of modem world.
That is why we bring out this book of Practical Financial Accounting
with advance methods, Practices and in a inimitable style. The
students businessmen, traders, industrialists and professionais
must know financial accounting to real life situations. The book
opens up the gateway of analysis to the world of accounting to
those who go in for the study of accounting methods and techniques
academically as well as practically. This book has been written in a
"Teach Yoursdf" style strictly following a student friendly
approach and essentially meant to serve the matter for their
examination as a tutor at home.
This book is useful for B.Com., B.B.A., M.Com., M.B.A., C.S.,
CA., LCW.A. students and professionals. The present edition of
the book has several unparalleled features which make it distinct
from other books. Every chapter is logically set and graded. Some of
them have been even sectionalised to facilitate the readers. Power of
grasping the subject and thereby grow self-confidence in the mastery
of it. The essential topics are:
Essential Functions, Principles and Standardisation of
Financial Accounting, Advanced Mechanised Accounting, Data

•


Processing and Programming Languages, Sensitivity for Business
Alternatives, Practical Accounting of Material, Production and

Labour, Financial Decision Making, Financial Leverage, Ratio
Analysis and Financial Statements etc.
I am confident that above features would make this edition an
invaluable asset to students and professors of commerce,
management and accounting. I wish to express my sincere thanks
to several individuals who have been a source of inspiration and
support both personally and professionally. Readers views,
comments, criticism and suggestions are welcome.
Author


CONTENTS

•

Preface

1.

Essential Functions For Financial Accounting

2.

Principles Of Financial Accounting

iii
1
11

3. Standardisation Of Financial Accounting

25

4.

Effective Financial Accounting Methods

36

5.

Corporate Accounting Techniques

51

6.

Methodology Of Human Resource Accounting

65

7.

Advanced Mechanised Accounting

72

8.

Capital Structure

82

9.

Partnership Accounting Procedure And Methods

93

to. Data Processing And Programming Languages

106

11. Sensitivity For Business Alternatives

117

12. Assets Categories And Business Transaction

1,l9

13. Practical Accounting For Material, Production
And Labour

137

14. Value Added Accounting

161

15. BudgetaryControl

176


16. Working Capital And Financial Decision Making

193

17. Financial System And Leverage

215

18. Ratio Analysis And Financial Statements

226

•

264

Bibliography


1

ESSENTIAL FUNCTIONS FOR
FINANCIAL ACCOUNTING

~,

The society in general and the busin~ss community particular
have the capacity to provide a large number of teaching aids. It is
for the teacher to locate such aids and evaluate them. The local
newspaper, the national dailies, the economic and business dailies,
the economic and business magazines are all full of enrichment
material for teaching of commerce. A close contact with local
business personnel will also provide rich resources and so it is
desirable for the commerce teacher to interact with local business
people and to welcome opportunities to widen his horizon beyond
the class room by associating with the business leaders of the
community. Foreign business magazines and periodicals are also
potential sources of teaching aids for commerce education. Some of
the famous business magazines are Journal of Business Education,
the Business Education World, and The Balance-sheet.
Statistics and formula; a moving panorama of the world in
which we live-right now, while we are living in it not as a dreary
drill of text-books and tests. In short I feel that one of broadcasting
which is most helpful contributions to educational and one of its
real responsibilities to it self and its listeners is the popularising of
education itself".
Radio and tape recorder have made possible the recording and
reproduction, as also, the storing and dissemination of sound and


2

Essential FunctionsJor Financial Accounting

voice. Being primarily concerned with the spoken word, the radio

breathes life into dead words and can be a source of inspiration to
speakers. The radio uses expression and sentence-structures, which
are more speakable and which are more easily comprehensible. On
radio the human voice rides at a terrific speed circulating the earth
seven times in second. Recording on tape and disc has further made
it possible for the spoken words to be captured, preserved and
repeated when needed.
Use ofRadio Broadcast in Teaching of Financial Accountancy:
The use of radio broadcast is quite important in teaching of
commerce if it can be properly utilized. For its proper utilisation
following points should be kept in view:

(a) Radio broadcast is simple an aid to teaching accountancy
and not a substitute for it. It is just like a laboratory for
experiment, a trip etc.
(b) It is desirable to hear such a broadcast in class room instead

of a auditorium of any other large room.
(c) For making out best utilization it is essential to select the
broadcast very carefully on the basis of probable value in
furthering the pupil's learning.
(d) election of the radio broad casts can b~ done much in
advance so that teachers get enough time to plan for better
preparatory and follow-up activities.
Accepting and assimilating criticism which they would not
ordinarily receive in the class-room.
The relationship between the instructor and the production
expert determines the quality of presentation. The instructional
expert, normally a qualified academician too, often tends to regard
the production experts as the 'technician' without any academic

stature. This tendency should be curbed before any worthwhile
production can take place.
Television is a visual method and to attempt the production of
good instructional programme without a versatile artist is to attempt
to produce dairy products without the source of milk.
Organisation of the total effort should include, besides
instruction and production specialists, an expert in programme


Essential Functions for Financial Accounting

3

system analysis, who is responsible to analyse the educational
needs of the educational institutions and to recommend the most
efficient use of media.
An educational psychologist should be an integral member of
the team for testing and evaluating the result of the instmctional
methods as well as for advising on method to be used. A great deal
of research is necessary to theorise Educational TV's impact on
learning process.
Television in Accounting Education: The use of TV education
in India is becoming more and more popular. Now we find a good
number of educational programmes on our TV sets. There is a regular
educational service for school and college students and a number
of model lessons are shown on TV in the educational programmes.
So far there has been a provision of open circuit television in
our country and the use of closed circuit television has not been
introduced. The closed circuit television is a type of micro-level
local arrangement generally limited to a single schools. It is used to

transmit sound to a limited network connected by cable or microwave
system. It is not received by other TV sets which are not connected
to this network. Moreover the signal is not required to meet the
commercial broadcasting regulation.
Growth and development. The teaching aids are the stimuli for
learning 'why', 'how', 'when' and 'where'. It is 'hard to understand
principles' which are usually made clear by the intelligent use of
skilfully designed instmctional aids.
The significance and the educational importance of audiovisual
teaching aids has been noted down by the many Commissions in
their report as follows:
It is hardly necessary to emphasize the role that audib-visual
teaching aids, film and radio talks, can play in the liberalizing of
the accounting education. In some states they have been developed
to such an extent that most of the colleges are able to obtain such
aids from the Education Department. We recommend that a central
library of educatio· ..11 films should be availa~le in each state and
the films of great value should be sent from the\entral government
to the states periodically. We recommend also that educational films


4

Essential Functions for Financial Accounting

suited to Indian conditions should be taken and made available to
schools and colleges of our country.
As regards to radio, we are glad to learn that through the AllIndia Radio (AIR) arrangements have been made for school and
college broadcasts. It is hardly necessary for us to emphasise that
such broadcasts should be done by well qualified persons and

should create an interest in the subject so that the boy's curiosity
can be roused to learn more about the subject. Nothing is calculated
to produce in the child an aversion for such broadcasts as the
monotonous and none too graphic description that some times is
given by persons not quite familiar with the psychology of the young
mind. It should not be treated as a routines duty which can be
discharged by any teacher in the area. Care must be taken to see that
an expert panel of head masters and teachers is constituted to take
decision on : (i) the subject to be dealt with, (ii) the manner, in which
it is sought to be dealt with, (iii) persons competent to give such
talk. If school broadcasts are conducted on these lines, they will
form a very efficient supplement to education.
Audio-Visual Teaching:

(A) Best Motivators: They are the best motivators. Students
work with more interest and zeal. They are more attentive. Students
in accordance with the patterns and principles set by the society.
(B) Television: Television is one of the commonly used teaching
aid in U.s.A. for accountancy. In India a beginning has been made
to use television as teaching aid. In a study conducted in U.s.A. it
has their homes spend about 23 hours every week on televiewing.

Education programmes through television can make available
many needed and for inaccessible learning experiences, to the
students, which lend efficiency to the class-room instructions. It
also brings about continuing cooperative planning by teachers,
supervisions, learning material experts and skilful television
production teams. Good and effective educational television of
context analysis and of selection and inter-related use of this most
appropriate instructional media.

Significance and Merits of Teaching I1Istructions through
Television:
(a) Availability of Direct Stimuli: Learning can be
accomplished more effectively by televised instructions than by


Essential Functions for Financial Accounting

5

conventional methods. Proper use of Television's illustrative
technique can provide a more direct impact as compared to a direct
lecture or text-book. This is accomplished through a direct pictorial
representation of fact or theory, utilising static or dynamic
visualisation. Pictures provide a stronger and more direct stimuli
to student thought an understanding in comparison to words.
(b) Consistency in Teaching-Learning: Communication by
speech is a learning skill. Seeing the thought stimuli provoked by
sign begin shortly after birth and comprise the base of experience
on which sensory reaction and knowledge are built. Through the
use of visual media, consistency is built up into the instructional
system and thus it is more reliable for students.

For the teaching of accounting these things are also useful.
These things have their effect on the sense organ of students and so
a co-ordinative teaching is possible. In the accounting education
today an attempt is made to co-ordinate the working of Head, Hands,
Eyes and Ears. It can be achieved by proper use of modem teaching
aids.
The modem teaching' aids occupy a significant place in the

process of education. Aids are of three types:
(a) Traditional aids: Text books. Black-board etc.
(b) Visual aids: Pictures, Sketches and diagrams etc.

(c) Audio-visual aids: Radio, T.V. Films etc.
Tn the present day society for imparting accounting education
we need many types of modem teaching aids. These teaching aids
are needed to impart education of accounting in a modem way.
Audio-visual aids have brought about a revolutionary change in
the accounting education system. Even more sophisticated
accounting teaching aids may be available in near future and such
sophisticated and advanced accounting teaching aids may be
available for use in teaching the coming generation.
Audio-visual teaching aids or devices or technological med ia
or learning devices are added devices that help the teacher to clarify,
establish, correlated and coordinate accurate concepts,
interpretations and appreciation to en,able them to make learning


6

Essential Functions for Financial Accounting

more concrete, effective, interesting, inspirational, meaningful and
vivid. The aim of teaching accounting with technological media is
"clearing the channel between the learner and the things that are
worth leaving."
The important assumption underlying audio-visual teaching
'- aids is that learning clear standing-stem from self experience. The
teacher of accountancy subject must 'show' as well as 'tell'.

A udio-visual teaching aids give significant gains in
informational learning, retention and recall, thinking and reasoning,
activity interest, imagination, better assimilation and personal.
The selection of modern teaching aids to be used for accotmting
is difficult because of the fact that instructional material need for
different subjects of commerce programme are almost limited. The
government sanctions grants and financial aid for the purchase of
such aids, from, time to but the amount sanctioned is limited. For
these reasons we have to be very careful in our selection of audio
visual aids. T~s pick and choose of the material must be done by
teachers most cautiously, intelligently arid wisely. Some efforts
should be made to eliminate such material which distorts facts. For
a proper selection the schools must collect a very detailed
information about various items available from various sources
and exercise their good sense in the choice of their material. It is
always better to have a committee of teachers for making the
selection of such teaching aids because of the following reason:
"Blind buying is always hazardous, the committee should
establish and follow the policy of seeing before purchasing. It is
well to remember that new models, equipments and materials are
often advertised before they are ready for distribution. No matter
how attractive they appear on paper or in the salesman's talk, they
should not be bought. Every new product has 'bugs'. Competitive
demonstrations or tryouts under identical conditions represent on
excellent method of obtaining comparative data. A wise salesman
will always welcome such an opportunity. If he does not he
evidences a lack of confidence in his product and should be
avoided."

Essential Functions for Financial Accounting

7

The following cri terion may be used for selection of the material
to be used as an accounting teaching aid.
•

It must supplement the text-book information.

•

It must represent correct, real and concrete examples.

•

It should be commonly used in business and / or
Government offices.

•

It should be easy enough to enable even the beginners in

the Business jobs.
•

It should be interesting, comprehensible, concrete, clear,
and concise.

•

It should be capable of being used effectively.

•

It should be free from any undesirable propaganda and

advertising.
Flannel Board : Generally the accountancy teacher finds it
convenient to deytct items on the flannel board. Various items are
made out of chart paper, pieces of sand paper or cotton are pasted
on the back side of each item. Instead of writing with a piece of
chalk various items are stuck against the surface of the flannel board.

Flannel board is more useful to depict certain diagrams, results
etc. particularly when we have to make clear interrelationship or
the continuity of various steps. Flannel board introduces novelty
and change in the class atmospheres.
Projective Aids: In this type of accounting teaching aids are
included as aids like film strips, opaque pictures, motion pictures
etc.
Film Strips: Following advantages accrue in the use of such
teaching aids:

(a) The film strips can give new colour and attraction to
different ideas in commerce.
(b) The image can be kept before the students as long as we
desire. The diagrams of results etc. can be shown again
and again.

(c) These do not burden the minds of students and can be
shown even in off hours.


8

Essential Functions for Financial Accounting

A film-strip contains. Series of still pictures about 24-48 frames
arranged in a sequence.
About the Utility of Films as Teaching Aids: Edison a great
scientist, remarked, "The only text-book needed will be for the
teachers own use. Films will serve as guide posts to these teacherinstruction books and not books as guides to the films. People will
learn from films every grade from the lowest to the highest. Films
are inevitable as practically the sole teaching method."

Suitable films can be obtained from universities and
departments of education of different states. Films can also be
borrowed from Ministry of Broadcasting, Ministry of Education
and Publicity department of states. Films can also be loaned, free of
charge, to schools and colleges by certain foreign embassies.
The films strip include certain diagrams and situation in a
proper sequence. The ideas are beautifully presented before the
students. However, the teachers should plan the use of a film-strip
and see for himself before using them for the students. The teacher
should know the details and other points that have to be
emphasized. In India films are not much in use but in foreign
countries they are more used.
Education Films: Broadly speaking, a film is of a 1\ multiple
method of communication and learning. It presents facts in a

realistic way, dramatises human relationships, arouses emotions
and transmits attitudes. It may be used for the communication of
ideas, attitudes and experiences to the masses of the people outside
the class-room. An educational film has been described as the
greatest teacher because it teaches not only through the brain but
also through the whole body. It has a very powerful influence on
the minds of children and in shaping their personality. The main
aim of educational film is to elevate and educate the
Economically Viable: Utilisation of video helped learning
system and internal video feed-back techniques hold promise for
meeting the pressure of information, requests, while at the same
time maintaining favourable cost benefit ratios especially with the
use of INSAT.
Services of Super Teacher: Through television 'the super
lecturer' or 'master teacher' is available at number of places
simultaneously, without the expense of time and toil for travel.


Essential Functions for Financial Accounting

9

Education of Great Number: Television is capable of providing
the best possible instructions for a very large number of students.
Multiplication and Magnification: Television is an instructional
and teaching tool that makes possible multiplication and
magnification of distance and time factors and act as storage of
accomplished and tested instructions. Multiplication implies the
extract reproduction of an instructive situation with transmission
of an unlimited number of students, for example the magnification

and distribution of 'live' surgical techniques and magnification of
minute biological reactions, specially in circumstances where
normal observations would be difficult.
Efficient Use o/Educational Television: Television, a complex
tool for possible development of excellent instruction, can be effective
only if properly used by good craftsman. The key to efficiently,
inspirational and practical educational television is co-operation
among progressive administration, a dedicated and sincere faculty
and an educationally aware and technically knowledgeable staff.
There is no other medium of instruction which relies as heavily for
quality on the interaction and interdependence of the team of experts;
the manager, the educator, the artist and a number of other persons
to be selected as much as for their ability to cooperate with others as
for their competence in their respective fields.
Radio: The potential of the radio teaching as an instructional
aid is being recognised more and more over the world. RG. Reynolds
writes, "Radio is the most significant medium for education as its
broadest sense which has been introduced since the tum of the
century. As a supplement to class-room teaching, its possibilities
are almost unlimited. Its teaching possibilities are not confined to
the fixed hours of the school day. It is available from early morning
till long after midnight. But utilising the rich educational and
cultural offerings of the radio, children and adults in communities,
however remote, have access to the best of worlds stores of
knowledge and art. Some day its use as an educational instrument
will be as common as text-books and black-boards".

Fradric Wittis has rightly remarked, "I like to think of education
by radio as a timely, vital and dramatic thing, a system of learning
or acquiring more information; a means of widening ones horizons

or enriching ones life and breaking down prejudices through


Essential Functions for Financial Accounting

10

inspiration and not perspiration; an education by desire and not by
discipline; a pattern of swiftly changing pictures, event with keen
interpretations, not
The broadcast be evaluated keeping the following factors in
mind:
(i) Do the materials presented ~ontribute to the attainment of
objectives of the educational programme.
(ii) Is it authentic and all details are accurate?
(iii) Does it have unity?

(iv) Is the programme suitable for the grade level for which it is
being considered?
(v) Will the programme arouse interest and motivate the listener
to read more about the subject presented?
(vi) Does the programme summarise the main points and hence
fix them in the students mind?
(vii) Is the programme presented in a interesting way?
(viii) A Radio broadcast may be considered only an assignment
for further study.
(ix) The teacher should make a sincere effort to assess the results

of a broadcast.
Motion Pictures: Motion pictures are also used as teaching

aids for teaching of accountancy. In their usual display they resemble
the TV programme but they differ in the following respects:

•

TV programmes are available on a definite date and time
where films can be seen at any time.

•

Teacher has no control on TV programme but the film
programme can be adjusted by the teacher.

•

Some good films help in imparting certain factual
information and developing performance skills.

•
•
•

Film bring about a chance in thelttitude of a child.
Short single concept film has nIore advantage.
Film increase learning by repetition of some key points.

000


2

PRINCIPLES OF FINANCIAL
ACCOUNTING

Financial Accounting Method has first step in collecting
business data and information is compiling a set of adequate
definitions of the categories concerned so that there can be no
confusion one the part of the reporters. In the private business
organisation there is some confusion in revenue between taxable
and nontaxable sales, and there is always the possibility of
confusion in classification of business expenses unless they are
carefully designated by accountant. In the modern commercial
world there are various manuals of accounts published by trade
associations, each adapted to specific business needs.
In the semi-public field of the public utilities, the regulatory
bodies publish recommended set of accounts and procedures. For
local governments the State Municipal Finance Act and the state
governments publish recommended systems of accounts.
The collection of business data and information usually begins
with manual recording. The business data may be transposed to
punch cards or put on tapes or disks for tabulation by electronic
machine accounting-assuming there is a sufficient volume of
business transactions to warrant the use of high-speed machines.
The intermediate step in mechanization, if the volume of
business activities of a company is not high, is manually operated
accounting machines. These have a disadvantage in that they cannot


12

Principles ofFinancial Accounting

automatically store business data and information to be retrieved
by the machine itself.
If computers are used and the program is properly designed,
the business machine can store and tabulate the details of the
transactions, prepare reports, and print them out as a final result.
The rapidity of the operation is important to all segments of the
economy, but the interpretation of the business results is still a
human function and management still has to make the decisions
based on the reports rendered by the computer information system.

Accounting postulates and principles denote many
propositions (assertions) about accounting. 'Postulates' refer to
those basic business propositions which describe the accountant's
understanding of the business world in which the modern
accounting functions are performed. These are generalisations about
the environment of accounting which are based upon a more or less
comprehensive view and understanding of the modern business
environment. The term 'principles' on the other hand is used to
denote those important propositions which are based on the
postulates and refer expressly to accounting problems related to
modern business.
Postulates are the important assumptions on which business
principles rest. They are derived from the economic and political
environment of that country and from the modes of thought and
customs of all parts of the business community. To be more precise,
postulates are assumptions which are reasonable as well as
necessary and which are not arbitrary or capricious in nature. To
the extent these accounting assumptions conform with reality, as

perceived, they strengthen accounting principles and they are
accepted as accounting postulates. In ordinary discourses
accounting postulates are often left unexpressed or implied.
Accounting principles are also described as accounting
conventions. This does not mean that every proposition which
accountants accept by convention is always a valid one. Describing
accounting principles as convention is intended to convey the idea
that they are generalisations or inferences drawn from a large body
of business data and that they are not intended to be literal
descriptions of reality.


Principles afFinancial Accounting

13

Accounting principles or conventions are sometimes called as
concepts. This is not strictly appropriate. An accounting concept
consists of a coordinated set of ideas about a given thing. A concept
may be complete and well established, or rudimentary and subject
to dispute. A complete accounting concept contains ideas about
what the thing is, what it is not, and what its relationship to other
things is. Mutually understood accounting concepts are a
prerequisite to communication and the exchange of ideas in modem
business world. Concepts of intangible things are more difficult to
develop as abstract ideas because direct observation is impossible;
they are also more difficult to establish through agreement because
differences of opinion cannot be settled by common observation in
modem business world.
There is general agreement among professional accountants of

an economy about certain concepts which underlie or permeate
accounting principles, e.g., (1) Entity Concept, (2) Going Concern
Concept, (3) Money Measurement Concept, (4) Concept of
Consistency between periods for the same entity, (5) Concept of
Conservatism, and (6) Material Concept.
Some times accounting concepts are also known as 'Basic
Accounting Postulates'. Let us examine the most important
accounting postulates or concepts.
Basic Accounting Postulates:
Accounting records are based on quantitative data for only
quantitative data can help in making rational, economic business
decisions of modem world.
Goods and services manufactured by an organisation are
distributed through exchange and are not directly consumed by the
manufacturers. This important accounting postulate suggests that
self-consumption of goods by manufacturers does not comprise a
large part of the economic system of a country.
Economic activity of a country is supposed to be carried on by
clearly identifiable legal or economic business entities. Accounting
records of a business are thus maintained and accounting results
are summarised in terms of particular business entities. Whether it


14

Principles afFinancial ACCollnting

is a proprietorship concern, a partnership firm or a joint stock
company, the business is considered a separate business entity and
its affairs are distinguished from those of its owners. Thus,

accounting income is measured as it accrues to the separate business
entity in the form of realised increases in net assets, not as amounts
payable to owners. Likewise, an obligation of the business entity to
owners is treated as a liability of the business entity and shown on
the Balance Sheet in spite of the fact that in a more conventional
sense the owners owe a portion of the debt to themselves.
Every economic activities are generally carried on during
specific periods of time. Any report pertaining to the any business
activities should be identifiable clearly with the period of time
involved.
Money is the common denominator in terms of w!lich all
business transactions, i.e., exchange of goods and services including
labour, capital and na tural resources are measured. The accounting
records and reports must clearly show the monetary unit used for
accounts. Many business transactions could be stated in physical
or time units of measurement. However, the diversity of units would
make record-keeping and particularly summarisation of position
and results of business operations very cumbersome.
In the absence of evidence to the contrary, a business
organisation is viewed as remaining in operation indefinitely.
Obviously, the most probable situation for company in general is
that it will continue to operate for an indefinite period of time. The
important significance of this postulate is that it removes the
liquidation idea from the accountant's viewpoint. The probability
that specific productive assets could be liquidated only at a loss, or
the fact that if a company ceased operation, certain liabilities would
mature immediately and need payment in excess of their present
value is not allowed to become a basis for accounting for assets and
liabilities. Besides, the going concern postulate gives the logical
basis for recording probable future economic benefits as assets and

probable future outlays as liabilities of an organisation. This does
not imply assuming permanent existence of the company, but simply
that it will continue to exist long enough to carry out present business
plans and meet contractual business obligations.


Principles afFinancial Accounting

15

This proposition has the effect of broadening the scope of
accounting beyond the limitations of liquidation value and of strictly
construed legal rights and obligations as in the case of accounts
receivables, inventories, equipment and buildings, intangible assets
and also liabilities of a concern. Accounts receivables are shown as
the amount of the anticipated future cash receipts, not at the present
realisable (liquidation) value of the receivables in the market. Minor
legal defects, if any, in the business transactions are ignored for
accounting purposes of the company. Besides, provision for doubtful
debts is not based on immediate market (liquidation) value nor on
the right to sue and obtain judgment. Inventories, work in process
and finished goods are assumed to be wor~h more than the raw
materials on the basis that the work in process will be completed
and finished goods sold in the due course of business activities of a
going concern. The immediate market value of work in process is
usually lower than the market value of materials before processing,
e.g., white paper is worth more than printed pages unless process
of assembling the printed pages into books is completed and the
books can be sold at a price above cost. In the case of depreciable
assets like building and machinery, the effects of random changes

in the immediate market prices can be ignored because it is assumed
that the going business concern is interested in using up the services
of the fixed assets rather than selling them in the market. The amount
of depreciation annually charged is also based on an estimated
useful life of the fixed asset with the underlying assumption of a
going concern being in operation at least as long as the useful life of
the fixed asset and recovering the undepreciated cost of the fixed
asset from future revenues of the concern. Again, when costs are
allocated to future periods as in the case of prepaid expenses,
research and development expense and cost of patents, trade marks
etc., it is assumed that the company will continue to work in the
years to come. On the other hand, estimated liabilities contingent
upon future eventualities (even though not legially enforceable) are
also taken into account on the basis of the' going concern' concept
of accounting.
When the continuity of operations is accepted as a valid
proposition, it follows that accounting reports have also to be on a


16

Principles ofFinancial Accounting

continuous basis. Financial reports of the company are thus actually
prepared regularly and are interrelated. Thus, estimates made in
the past financial period are usually adjusted in the following years'
accounts if they are found in retrospect to be too high or too low.
Accounting records of the company should be always based
on factual business information. Changes in assets and liabililies,
and the related effects, if any, on revenue, expenses, retained profit,

etc. should not be given formal recognition in the accounts of the
country till the point of time at which they can be measured in
objective terms. The important element in the objectivity of any
observation or interpretation is the agreement of competent person
as to what has been observed or experienced. The term objective
evidence, then, means evidence that is sufficiently clear cut so that
there will be very little difference in their interpretation.
The consistency postulate of accounting implies that the
procedures used in accountancy for a given company should be
appropriate for the measurement of its financial position and its
activities and should be followed by the company consistently from
period to period. This does not mean that once a particular
procedure has been adopted by the company it must never be
ch;;tnged. Changes should be made, if necessary, but the change of
prhcedure must be fully disclosed along with the monetary effects
of such changes on the financial statements of that company. The
user of financial statements is entitled to believe that the procedures
used in arriving at the reported income and state of affairs during
the current period were consistent with those used in the previous
period, unless a change in procedure is reported as an integral part
of the financial statement. Moreover consistency does not mean
uniformity or even comparability among independent units of
business activity. What is needed is consistency of procedure
between periods for the same entity, and disclosure of change, if
any, made in a particular period. The significance of the consistency
postulate will be fully realised if it is understood by the company
that changes in accounting data from period to period, and the
direction and rela tive size of such changes, may be more significant
than the absolute amounts reported by the management of that
company at any given time. In order that accounting data may be

Principles of Financial Accounting

17

interpreted and compared over time, it is very necessary that shifts
from one accounting procedure to another should not be made
capriciously by the company.
Transactions of business entities are reflected in the accounts
in terms of the monetary unit at the time of the transaction, and
there is continued use of the same money of account, even though
there are changes in the purchasing power of money during the
intervening period. This postulate shows that the 'Rupee' or 'Taka',
or 'Pound-Sterling' is a useful standard measuring unit. In other
words, the financial records and statements of the company
prepared on the basis of those business records should reflect the
historical money costs. It is admitted by chartered accountants that
this is an unrealistic accounting postulate as it implies that
fluctuations in the value of money should be ignored. It is, therefore,
suggested that management of the company may include in their
periodic reports to owners comprehensive supplementary
statements which present the effects of the fluctuation of money
value upon net income and upon -the financial position of the
company.
According to this postulate accounting reports of the company
should disclose that which is necessary to make them not
misleading. This applies not only to business transactions and
events that have occurred during the period covered by the financial
statements, but also to material events that occur after the balance

sheet date but before financial statements are released. Typical
examples of such events are: sale or destruction of a fixed asset of
value, a significant decline in the market price of raw materials, etc.
which may have a material bearing on the probable future earnings
and position of the business entity. In short, there should be a full
disclosure of material known facts which will aid an informed
reader of financial statements in interpreting accounting results.
Disclosure of facts may be made in the body of the statements and
in supplementary or accompanying notes.
The chartered accountant should not attempt to record business
events which are so insignificant that the work of recording them is
not justified by the usefulness of the results. In dctual practice there


18

Principles (~fFil1t1ncit11 Accollnting

is no exact line of difference between material business events and
immaterial business events. The decision depends on judgment
and common sense. However, a general definition of materiality is
as follows: A statement, fact or item is material, if giving full
consideration to the surrounding circumstances, as they exist at
the time, it is of such a nature that its disclosure, or the method of
treating it, would be likely to influence or to make a difference in the
judgment and conduct of a reasonable person.
The main purpose of this accounting postulate is to insure that
the uncertainties and risks inherent in any business situation are
given adequate consideration in books of accounts of the company.
It is a guide to the exercise of judgment where evidence is conflicting

or not clear, and suggests that matters of serious doubt be resolved
in the dkection of understatement rather than overstatement. Thus,
this postulate requires that reasonable provisions should always
be made for potential losses in the realisation of recorded assets
and in the settlement of actual and contingent liabilities. To put it
difiercntly, if the accountant has reasonable choice, he should
ordinarily show the lower of two asset amounts for a given item, or
should record an event in such a way that owner's equity is lower
than it would be otherwise. Again conservation is said to imply the
d ictul11 - anticipate no profit and provide for all possible losses.
Sales, revenue and income are not to be anticipated; and should be
recognised only when realised i.e., on completion of sale and
delivery. Besides, all known liabilities and losses should be recorded
in books of accounts regardless of whether the definite amounts are
determinable. However, the postulate should not be applied to make
an uncompromising virtue of understatement of assets and income
of the compunderstatement in the face of evidence to the contrary.
Principles of Financial Accounting:

The accounting principles which underlie accounting records
may nm\' be studied here in detail. These are best expressed as
"generallav\'s or rules adopted or professed as a gu ide to action, as
a settled ground or basis of conduct or practice".